mobile banking - Strands Finance

THE BEST OF

FINTECH PULSE Thought leadership highlights 2016

4 WAYS TO COMPETE IN

MOBILE BANKING “Mobilis in mobili”

ARTIFICIAL INTELLIGENCE IN BANKING: PAIN IN THE BOT? THE STATE OF THE BANKING INDUSTRY IN

2016

FINTECH PULSE

blog.strands.com

The Best of FinTech Pulse Thought leadership highlights 2016

© Strands All rights reserved. No part of this publication text may be uploaded or posted online without the prior permission of the publisher. For permission requests, write to the publisher, addressed “Attention: Permissions Request,” to [email protected]

2016 Welcome to the first edition of FinTech Pulse Magazine. Here you will find the top-rated articles written by the Strands experts! As 2016 draws to a close, it’s a good time to reflect back on the past 365 days. The FinTech world is constantly evolving, with plenty of changes that prompt shifts in both consumer and banker behaviour. In order to succeed and win the Fin-

3

Tech race, we are keeping our pulse on the latest and the most effective strategies in digital banking. Here we share our observations and conclusions to help you stay ahead of the curve. Enjoy the read!

CONTENTS 05 06 11 15 17 21 27 31

Editor’s note Kantox interviews Erik Brieva The state of the banking industry in 2016 The crucial data missing from your online banking... 4 ways to compete in mobile banking: “Mobilis in mobili” PFM as meaning: Strands interviews Michal Panowicz, Digital Innovator Artificial intelligence in banking: Pain in the bot? Conclusion

4

EDITOR’S NOTE The world of digital banking has been undergoing a significant evolution process in just a few short years. At the same time, the future holds so much promise for bank customers, innovation, and growth opportunities for established financial institutions and fintechs alike. Like all great disruptive eras, this is a time of great uncertainty and unprecedented change. During this tumultuous period, banks urgently need to redefine the value they aim to offer their customers. Do they want to finance the small business dreams of a Millennial and/or be their omnipresent, social media based retirement coach? Either path leads to a major rethink of the banking services being delivered. The aim of the Strands blog, FinTech Pulse, has been to keep a finger on exactly that - the digital transformation of banking as we know it, driven by FinTech innovation. It is an open space for financial technology experts inside and outside of Strands to chronicle and opine on their obWe hope you enjoy it.

5

servation of and participation in the industry’s metamorphosis. Since its inception, FinTech Pulse has nurtured a healthy reputation for strong thought leadership, fresh and original content, and expert insights in the world of fintech and financial services. With this special compilation that we are calling the FinTech Pulse Magazine, it is our honor and pleasure to share with you the most successful posts in terms of readership, originality and editorial richness. From taking a hard look at AI in banking to philosophizing on PFM as meaning, FinTech Pulse truly has something for every kind of financial tech enthusiast.

KANTOX INTERVIEWS

ERIK BRIEVA It is becoming an increasingly difficult task – verging on mission impossible – to find original viewpoints inside a FinTech landscape that is getting more and more crowded. Fortunately, Kantox had the opportunity to interview Strands CEO Erik Brieva, a leading voice at one of the firms with the most potential in this ecosystem. Of particular interest are his vision on the future of FinTech-bank partnerships and his opinions on how banks find themselves stuck in a “sandwich”, threatened by both these new actors, on the one hand, and tech giants such as Google and Amazon on the other.

In your Twitter bio, Strands is defined as “The FinTech partner for banks”. It seems times are changing for this young industry. That’s right. It’s true that the majority of today’s most successful firms were born with the aim of competing directly with banks for the same segment of clients – especially B2B companies – through the creation of new products and the improvement of current products’ features. Nonetheless we are already seeing some cases of partnerships between new and old players, so I think there’s a

very good chance many FinTech firms’ positioning will move in that direction. However, we position ourselves directly as a fintech ally for banks, mainly due to the nature of the products we offer. In other words, we specialise not in competing with banks, but in helping them to make a qualitative leap in their technolo-

“Au contraire, BBVA: Banks will never become software companies”

gical base, facilitating the business model transformation demanded by the market.

which helps to convert them into loyal customers and ultimately has an impact on their business.

I guess then that such a technological “qualitative leap” goes far beyond mere improvements to the digital front end and the user experience (UX) of their financial products.

“Strands is working for some of the above-mentioned entities. After all, that’s what happens today at many traditional banks”

Sure. Our core product is money management technology built around Big Data and Machine Learning. Our main goal is to study, understand and segment bank product consumers through: 1) the management of transactional Big Data that banks gather and 2) the application of machine learning techniques to process the data and provide better products and services. This is a win-win for both banks and end consumers. The latter are provided with a more transparent and sophisticated service, which helps them to have a better understanding of their monetary attitudxes, in turn helping them to take financial decisions more independently, optimizing their purchasing power. Banks gain a better knowledge of their clients, so they can offer a much more personalized service,

of in-house product management and integration with standardised and packaged solutions purchased from software providers.

So you don’t think the trend will be banks beefing up their IT departments in order to develop all their own technologies?

Do you consider it a threat that the so-called challenger banks – e.g. Monzo, Atom and Starling Bank, etc. – are doing inhouse development?

Not long ago I heard BBVA’s CEO publicly announcing that in the future his bank would be a software company. I couldn’t disagree more. I think this is more a marketing strategy than a real ambition. I say this because banks’ development teams have neither the methodology nor the dynamics of a software company. In other words, for their departments to mimic the modus operandi of a software company, banks would have to buy one or several software companies.

In my experience, although many of these new players – including some of the above-mentioned firms – may have the bulk of their development in-house (particularly the product management), they also outsource part of their technology. In fact, Strands is working for some of the above-mentioned entities. After all, that’s what happens today at many traditional banks and has historically been the case, i.e. a mix

We all know examples of big companies such as systems integrator firms and consultancies, with hundreds of brilliant engineers – with great ideas in mind – that failed when trying to develop software that could be operated in a standard manner, These firms largely failed to keep up and evolve with the fast-pace of the market. This is what pure software manufacturers like Strands do really well.

“I say this because banks’ development teams have neither the methodology nor the dynamics of a software company” 7

8

How feasible do you find the idea of partnerships between banks and FinTechs – which currently compete for the same client segments – becoming the new normal, in both the B2B and the B2C spaces? This is a reality for Strands. But more than maintaining a simple client-provider relationship, we have established a link as a partners of the banks. The bank is interested both in improving and innovating through the quick acquisition of a technology that stands out in the market – whose development would be too costly in terms of time, money and efforts. This technology evolves at the pace of the market since it can improve as the banks and players adopt it. Besides, in this way, the new FinTechs do not compete with the bank, but help them in such competition. On the other hand, FinTech has the technology and the business model, but lack of cash, and therefore they need channels to arrive to new markets and clients. And that’s what the banks provide them with. I think this is a logical symbiosis.

Do you think that the kind of relationship you have with banks could be extrapolated to other FinTech firms, then? Banks consider B2B companies with our profile to be white label technology providers – software companies that work for them. Since we aren’t in direct competition with banks, we can maintain certain independence with our partnerships, and being associated with different financial firms can be seen as a positive value for them, in terms of having more experience, different

9

perspectives, and the required technological evolution and innovation. On the other hand, for FinTech B2C that compete with banks for the same end-consumer, either individual or business, it would be more difficult to establish a partnership model with banks. For example, I would not be surprised to see that for B2C partnerships, banks would put limitations on a FinTech firm’s capacity to partner with other competitors. In summary, I think that in order to reach a partnership, this is not a matter of technology or service, but of business model.

Kantox CEO Philippe Gelis argued in a recent article that banks should allow prospective customers to test their products before deciding whether they want to become clients. Do you think that this scenario is feasible anytime soon?

“Reaching a partnership is not a matter of technology or service, but rather a business model”

I think that this is an idea with great potential that banks are not using. On occasions we have proposed that our partners provide our standard products to their clients in demo mode – before exploring a deeper, more personalized and seamless integration with their current services – so they can learn from the feedback. In the end, it all boils down to using the lean methodology (see lean startup), i.e. not making a huge development effort from the beginning, but putting a minimum viable product in users’ hands, testing on the go and seeing how they use it and learning from them. Based on these takeaways, you can decide whether you want to add new functionalities or scale to higher levels of integration. It would make sense to apply this same concept to bank products.

Focusing on the evolution of the FinTech industry, we’ve seen tech giants like Apple, Google, Facebook and Amazon getting more and more traction, especially in the payments sphere. Do you think they will end up competing in other financial areas?

“Financial institutions face an enormous challenge today which only the smartest players will be able to turn into an opportunity”

The nature of your product suggests that you expect user interaction to become wholly digital. However, do you think that physical branches will still play a relevant role?

Definitely, even providing the whole range of financial services that banks offer nowadays. Indeed, this is nothing new. See the example of Wells Fargo, a firm that delivered packages all around the US that now has become the world’s biggest bank by market cap.

Honestly, I don’t see any future for them the same way I don’t see a future for cash, i.e. bills and coins. Think that, however complex the product might be, the user experience is destined to become easier and easier. Current robo-advisors are a great example. At Strands, we are working on something similar to such technology, breaking down all the information to make it easy for users to make financial decisions. What does this translate into? For example, we give users the chance to simulate several scenarios related to their investment portfolio, so they can make decisions much more independently.

This is a natural progression for firms like these with a huge client base. Amazon is another example of these companies that keep adding products to their offering so they keep the client more and more captive. But this goes beyond the financial world. Again, Amazon not only sells products: it is a shop of shops too, and it is also one of the most important technology providers in the world. In fact, it recently beat off IBM to win a public tender to manage the CIA’s IT. That’s some book store!

cle called Banking Sandwich explaining how traditional banks are threatened by the FinTech industry on one side and by the tech giants on the other. Financial institutions face an enormous challenge today which only the smartest players will be able to turn into an opportunity either by transforming their outmoded business models to become multisectoral tech giants themselves, by becoming big retailers, not only for financial products or by carrying out a vertical integration in some specific sector.

Going back to the banking sector, some months ago I wrote an arti-

10

THE STATE OF THE BANKING INDUSTRY IN 2016

What are the main challenges for banks in leveraging data to build new products?

There has never been a time of greater change in the banking industry. Customer demands are changing rapidly and banks are under huge pressure to adapt their services in line with these expectations.

Both of these take us back to the “traditional” corporate culture and technology that may not be so attractive to the most promising data engineering talent they so badly need.

Where are the biggest opportunities for banks in leveraging data to build new products?

How are banks responding to quickly changing customer demands?

Dr. Marc Torrens Chief Innovation Officer

Luis Rodriguez VP Product Strategy

In our experience, banks are actually hyper aware of changing customer demands, and are finally making efforts to start implementing solutions that meet these needs. This is a very good sign, and we see a lot of restructuring going on to adapt to new (read: lower) revenue scenarios, such as branch closures, as well as a big push for customers to embrace digital channels (which is also happening of its own accord). Unfortunately, where banks often struggle is making these adaptations happen quickly enough on their own - actually, this reactive rather than proactive approach is a problem to begin with. The reasons behind this can range from agile-unfriendly corporate culture to huge prior investments in legacy IT systems or the all-too-likely combination of the two.

11

Technologically speaking, banks lack streamlined, homogenised IT systems to prepare the data into a comprehensive, modern data “lake” that is clear and clean enough to be useful. Operationally, different data needs for different internal business units within the bank cannot be met by the tiny, unskilled data teams banks are only starting to hire.

In this special edition of FinTech Pulse, financial technology news leader bobsguide talks to Dr. Marc Torrens (CIO), Luis Rodriguez (VP Product Strategy) and Albert Morales (Product Manager) about the state of the banking industry today.

Albert Morales Product Manager

The main challenges for banks in leveraging data to build new products are of a technological or operational nature.

What are the top 5 ways financial institutions can transform great ideas into reality in banking?

•

Leveraging transactional data to generate unique information which leads to higher margins.

•

Embracing fintech technology and philosophy to increase internal operational efficiency, i.e. the lean approach.

•

Increasing user adoption by improving UX & brand friendliness to focus on long-term customer value.

•

Shifting from product catalog to solution provider - link services within other services provided by other sectors such as merchant marketplaces to build new sources of revenue.

1. Start with a clear mandate to understand and meet target market needs that comes from, or is at least supported by, top management. 2. Create a small, high-performance multi-functional team, spear headed by someone with a strong technical background on the business side who understands the implications of digitisation. 3. Partner with fast-moving companies on the outside that can help banks assimilate the lean/agile approach. 4. The IT team servicing the business cannot be a barrier - anything should be possible, and data should be easily accessible and clean. 5. Continuously test and co-create with real users, or anyone within the organisation - good ideas can come from anyone: that’s real open innovation.

12

What are the main hurdles impeding open innovation in banking?

Firstly there’s extremely complex core banking infrastructure that makes any innovation project very difficult, especially when it comes to accessing useable data. Then there are the organisational silos based on selling products rather than customer-centric problem-solving. Another factor is the lack of standard and open APIs to exchange data and services among different financial players.

What does the future of banking look like?

The bank of the future will be seen as a diffuse and distributed problem-solving service focused on the customer rather than just a catalog of financial products to be sold by the bank. Using leading-edge technology and flawless UX, banks will identify the financial needs and life goals of their customers and offer personalised, relevant solutions to meet these objectives. Cost transparency and control will be also key factors in the future of banking, as well as a sense of ubiquity in customers’ “life moments” made possible by stronger datasets and credit decisioning skills.

How does Strands approach designing personalised banking services?

The Strands approach involves providing banks with a deep and granular understanding of their customers’ financial situation and offering support and guidance to their customers by way of a data-driven, context-aware, anticipatory UI. Our software is designed to help banks implement relationship banking, which is the key to generating the level of customer engagement and retention it takes to create and maintain new revenue streams.

“Cost transparency and control will be also key factors in the future of banking”

THE CRUCIAL DATA MISSING FROM YOUR ONLINE BANKING When I log into my online banking, I always find two account balances: the one I see on the screen (duh) and the one I need to figure out in my head (ouf!). The worst part is, neither of them are accurate or satisfactory...

“How much money do I have? I mean, really?” I’m asking when I log in. Keyword: really! As a user, what I want is to have my financial commitments already factored into the figure I see, instead of just my account balance. I’d like to know how much I can realistically dispose of. Similarly, I’d also like to know how much I can actually save every month. In an ideal online banking world, I would have a holistic view of my entire financial situation, which means aggregating all my accounts (but that’s a story for another post...) Basically, what I want to see as soon as I log in to online banking is what I’ll call my “OK-to-Spend” amount. How much can I spend (or save) guilt-free?

15

HOW TO CALCULATE

OK-TO-SPEND The basic calculation is relatively easy: [ OK-to-Spend ] = [ Income ] – [ financial commitments ] (i.e. pending transactions, upcoming scheduled payments and direct debits)

Adding a bit of intelligence provides additional guidance that is highly valued by the customer: [ OK-to-Spend ] = [ Income ] – [ financial commitments ] – [ contributions to Savings Goals (if any) ] – [ identified spending patterns ]

“The contribution to Savings Goals” refers to virtual piggy banks where the customer can provision money for specific future expenses or investments. As these are serious “contributions”, the amounts should be subtracted from the disposable amount. By the way, these virtual buckets can actually become real savings accounts that are instantly created and provisioned by the bank. We all have spending patterns we are more or less aware of. I have a rough idea in my head (or in the Excel spreadsheet I built a few months ago and haven’t updated since!). I would love my bank to shed more light on my spending patterns and use them to help me manage my money better, wouldn’t you?

UPGRADING THE DIGITAL EXPERIENCE Naturally, my OK-to-Spend is the very first figure I’d like to see in my digital banking home screen. Next I’d like to take action on it, for example saving that spendable amount with just one click. What if I could even see what’s OKto-Spend without logging into my bank’s mobile app at all? If I can access LinkedIn, Facebook and Twitter (containing all my valuable social relationships) directly on my smartphone, why shouldn’t I be able to quickly check my valuable OK-to-Spend? Or receive a notification at just the right moment - in the middle of a shopping trip, for example?

Actually, on my mobile, OK-toSpend becomes a financial advisor on the go. A quick check lets me know if I can afford the GoPro I’ve been looking at or if it is the right day to book a long weekend in Thailand. With OK-to-Spend, interaction with my bank becomes more frequent, contextually helpful and aligned with my everyday life needs. But, it’s only one part of a holistic PFM solution - learn what else is needed for a complete digital banking experience in our white paper, The Essence of Digital Banking. Author: Xavier Marcillac VP Sales APAC

16

4 WAYS TO COMPETE IN MOBILE BANKING: “Mobilis in mobili” The essence of banking in the 21st century is digital. And by digital I really mean mobile, since most studies show that web traffic will become residual as mobile takes over as the “primary screen” among digitally connected consumers. By 2020, research estimates only around 6% of users will access services via PC.

2

MOBILE-FIRST: THE STRUGGLE IS REAL sical action (signature, branch visit etc) this trend is likely to continue. That’s why biometric technology and its incorporation into financial services will play a pivotal role in the road to digitalization.

Mobile banking does not mean simply launching an app - it requires banks to operate with an entirely different business model. The reasons for this struggle vary, but first and foremost is the limited capacity of traditional banks to generate revenue outside the branch. Today, 24% of banks report online channels as their main source of revenue, but in 2020 that number is expected to drop to 6%.

Secondly, banks are finding it hard to build an actual relationship with their customers. The average customer might interact with her bank twice a week, checking a balance here or making a payment there - but even the biggest commitment-phobes among us would hardly call that a relationship! Building a conversation means growing the number of meaningful interactions, moving

So, until banks come up with a way to onboard customers and deliver their products digitally - that means without requiring some sort of phy-

from engagement that happens on a weekly basis to several interactions a day. The third difficulty is banks’ limited capacity to handle all these touchpoints outside the walls of the new mobile branch - providing the same or higher levels of service while simultaneously leveraging all the additional insights generated by the customer’s digital life and data, which are heavily driven by social media and sharing.

BANKING REVENUES BY CHANNEL

1

THE BANK BRANCH IN YOUR SMARTPHONE

Due to rapidly changing consumer behaviour and the ubiquity of smartphones (the first and only way for many people to access the Internet and/or financial services), your device is perfectly poised to become your most convenient bank branch. This mobile branch is not necessarily confined within an app, but is actually dispersed throughout multiple interaction points or “touchpoints” within a myriad of social media applications.

If you’re thinking, “Hey, my bank doesn’t have anything close to that yet!” you’re not alone. Even the most established banks are struggling to adapt to this new reality, and mobile-only challenger banks like Starling and Number 26 are quickly disrupting and reshaping the financial services industry.

31 %

Mobile / Card

50 % 28 %

Physical

32 % 24 %

Online 6% 7%

Other

10 % 5%

Agents 1%

5%

Customer service 1%

17

18

3

DATA: SUNKEN TREASURE ON SHIFTING GROUND

Not only do banks face huge obstacles in creating truly customer-centric business models, but also face internal barriers such as product or organizational silos or legacy core banking systems, which prevent them from extracting sufficient value from their current data (never mind being able to enrich incomplete customer profiles with social interaction breadcrumbs!). Without leveraging that data, however, it will be increasingly difficult for banks to stay relevant, and therefore profitable, in the future. And beware again, for the ground itself is mobile! The expression “mobile banking” is based on a narrow view of the term, where mobile = smartphone. What the device really provides is connectivity, which is now being extended to... well, pretty much everything. The arrival of

the electronic SIM (eSIM), will be a key enabler in triggering the explosion of the internet of things (IoT) by making anything from wearables to cars to household appliances financially enabled. The next logical step is interacting with multiple smart devices woven into our world rather than exclu-

“it will be increasingly difficult for banks to stay relevant, and therefore profitable, in the future” sively with a single device in our pockets, which will require banks to redefine and rethink entitlement

models, security models and yet again the customer journey (with even more touchpoints added to the picture). And what about virtual reality? VR is maturing quickly as we saw in the last MWC and research shows that retail companies already consider VR as the key interaction mechanism with Generation Z, so perhaps branches might make a comeback. Imagine a virtual branch in your living room?

“You need to be a bit like Captain Nemo, from Jules Verne’s 20,000 Leagues Under the Sea”

4

CHANNELING MOBILE

Being competitive in mobile banking requires banks to do the following: Grow your digital revenue: a great way to do this is by implementing biometrics (and possibly regulatory changes). If your customers cannot onboard, buy or transact digitally, your bank is not digital. Your mobile app is still a mere communication channel, no matter how you spin it. Start building Relationship Banking: you need to turn mobile into a platform where this relationship can be nurtured, rather than just another channel competing for attention in an ever-growing number of life moments across all interaction points. Be customer-centric: build an intelligent, insight-driven financial management platform and you need to have a know-your-customer-data-driven, context-aware, anticipatory UI that will proactively anticipate customer needs and suggest a next best action, making every interaction meaningful.

Here’s hoping we don’t have to queue in the VR version...

Prepare for IoT: Perhaps you don’t have to redefine your entitlements model just yet, as IoT is not here yet, but do so at your own peril - technology has that old pesky habit of not waiting around for anyone! To put the above digital strategy into action successfully, you need to be a bit like Captain Nemo, from Jules Verne’s 20,000 Leagues Under the Sea (or for all you millennials, think Steve Zissou); use the best technology at your disposal to navigate “mobilis in mobili”: the changes within the change. Author: Luis Rodriguez VP Product Strategy

20

PFM AS MEANING

STRANDS INTERVIEWS MICHAL PANOWICZ, DIGITAL INNOVATOR During the 2016 Temenos Community Forum (TCF) in Barcelona, Strands General Manager Pau Velando sat down with digital banking thought leader Michal Panowicz, chief product and innovation officer at Kreditech and formally SVP & Deputy Head of Digital Banking at Nordea. Previously, Michal worked at mBank, a digital frontrunner ranked by Forrester Research as the #1 online retail and SME bank in 2014.

Michal, thanks so much for taking some time to speak with us today. I’d like to start by asking you: What is your understanding of the state-of-the-art in terms of digital transformation that banks are undergoing? Tell us your view on the revolution in the industry, and the trends that will shape the future of retail banking? I have two definitions of what a state-of-the-art digital bank is, but let’s start with what it is not: It’s not a bank that has the coolest mobile app, or that has made a splash with the latest technology here and there, or launched some innovative campaigns... For me, a state-of-the-art bank is one that can serve customer requests throughout the product or service life cycle, which is: inform > offer > open > amend > extend > transact > close. Any one of those activities along the lifecycle must be done digita-

21

lly: end-to-end, without any manual intervention between request and fulfillment. When you have that, magic things start to happen! Even the branch becomes a digital channel or touchpoint, just with a human-based user interface. These touchpoints become portals through which the customer enters into a product relationship, where they input data to a specific device and in a specific format or context. The other definition is outcome-based, determined by the percentage or share of sales events that are executed in digital. It’s interesting because people mention many strategies: go for Millennials, do mobi-

le-first (God forbid), do mobile-only (even worse!), cut costs, redo the branches, do something fancy for customers... These are often taken as silver bullets, but they are misleading as they can put you in a silo. Isolated strategies neither contribute to the core, nor can be extended universally across business processes.

You mention business process management a discipline that’s been part of the banking transformation for more than 20 years. It’s said that banks are very inefficient in handling internal processes... Would you agree that now the consumer is driving banks to find new ways to sell and deliver products or services? Is the consumer truly at the center of transforming internal business processes and the way banks sell?

I wouldn’t agree. That might be the narrative but in essence I don’t think it’s true. It could have been done before, if the consumer was truly in the center. Even 10 years ago there were capabilities to do it: banks could have re-engineered processes to be executed end-to-end digitally and the business case would pay for that.

“That’s why PFM is so essential to the user experience” So what’s the difference now? Maybe right now we finally have examples of people having performed it, but it’s a superficial observation of what’s happening rather than realizing what ingredients you have to run your FI to produce your product, and observing the capabilities and available resources to actually leverage them and perform.

The thing is, banks have been lagging in taking stock internally. But what has changed is that we finally have examples of it happening. Take mBank - who heard about it 3 years ago? A small bank in the middle of Poland - not Silicon Valley, not at astounding scale - BUT it is an example of digital actually working, happening, and producing to become profitable.

whether they are kings. Some still stick to laggard banks whose digital experience is now 20 years old!

Would you say a solid PFM is at the heart of digital banking, as we affirm in one of our white papers?

“PFM goes beyond transactions to form the core of the customerbank relationship”

I believe that what we call “PFM”, should be called as such not for the financial management aspect, but for functionalities like transaction aggregation, search, data standardization and cleaning, and most importantly, meaning (which we call “categorization”). That’s why PFM is so essential to the user experience, because it goes beyond transactions to form the core of the relationship. It’s universal, constitutes a primary relationship and is the gateway to another activity that most people do which is liquidity management. Most PFM tools help you to detect very easily, whether you have surplus or liquidity, and then helps people to make decisions. That’s the core - out of that you can build many other things, but PFM is absolutely essential and I would never go into any digital banking transformation without a best-inclass PFM engine. Plain and simple

I recently read a quote that said, “The customer is not king - he’s a dictator!” Do you agree? There are many attractive quotes that sound super cool, but in the end, customers vote with their legs and wallets - which really indicates

23

“Imagine you just log in, and in 3 seconds you solved a life issue... these unexpected situations are happening all the time”

So if you test this quote for its observable value right now, it’s not always true. But that doesn’t mean we shouldn’t do things for the customer, au contraire - but from a different perspective, and for different motivations.

So what type of customer demands do you think banks should listen to? First, give people real options to act remotely: inform them, give them an offer, allow them to open products, change, amend and extend, give digital options to move, transact and close. It doesn’t have to be complicated, and will unlock tremendous value because suddenly the cost of ownership decreases as you eliminate the need to visit the branch which is infrequent and costly, especially in terms of time; people really prefer to watch TV or spend time with their kids. Give an alternative and they will find it useful.

Michal Panowicz Digital Innovator

The second thing is to give information, not just unintelligible data. Transform that data into something that gives meaning to those transactions: the place of purchase, who the money comes from and where it goes, the exact purpose of that value transfer. People call it categorization, but that is a technical term for meaning. Finally, once customers have useful information, give them advice that allows for better financial decision-making. You proactively extend ability to make decisions, instead of hassling people to all the calculations inside their head. Support users so they only have to make a decision. It’s about convenience, trust, proactive service, and value. And you have tools right now to do it!

Where are the biggest needs in the personal finance space? And what kind of tools can meet them? Imagine the basic scenario of helping people to understand and act on the balance: after all, 98% of people check their balance upon logging in. But, they don’t get an explanation of where this balance comes from, where it’s going - yet that’s what

they really want to know when they log in... they have to mentally compute so many things themselves upon seeing their balance: “Do I have too much liquidity or too little?” And this is the magic moment for dispensing advice: “Too much? Do something with it! Invest! Too little? Cut spending! Don’t buy stuff! Borrow from someone! Consume some savings!” When you have that key contextual advice, you can act on it immediately. Imagine you just log in, and in 3 seconds you solved a life issue... these unexpected situations are happening all the time. People keep talking about Big Data - which by the way is already waning - why? Because it was improperly understood and so far badly implemented (by banks). But why would you go about Big Data when most banks can’t even handle simple data?

Very interesting point - so if you were to spend one dollar, where would you put it: in UX/UI or in Big Data/ artificial intelligence? I won’t have a proper answer, because you cannot decouple one from another! Assuming all other things being equal, if you took the capabilities and services the banks

24

have today, and only did the UI brutally speaking, it’s like putting lipstick on a pig. It looks good and maybe extends a little bit of the value, but not enough. Similarly, if you only do machine learning, users get the outcome, but they wouldn’t understand it as the information wouldn’t be represented well. All this to say, it’s never either/or - UX/UI and machine learning must go in parallel. Too many banks go UI-only, or rely on a new app to solve these problems.

Very interesting point - so if you were to spend one dollar, where would you put it: in UX/UI or in Big Data/ artificial intelligence? I won’t have a proper answer, because you cannot decouple one from another! Assuming all other things being equal, if you took the capabilities and services the banks have today, and only did the UI brutally speaking, it’s like putting lipstick on a pig. It looks good and maybe extends a little bit of the value, but not enough. Similarly, if you only do machine learning, users get the outcome, but they wouldn’t understand it as the information wouldn’t be represented well. All this to say, it’s never either/or - UX/UI and machine learning must go in parallel. Too many banks go UI-only, or rely on a new app to solve these problems.

Given that you cannot easily decouple UX and ML, which are two sides of the same coin, where do you place banks that are not pursuing these investments and sticking to the traditional banking model? Will natural selection cut them out of the market?

25

Sooner or later, absolutely. It might not happen anytime soon, as customers consider many parameters like brand, the hassle of switching, rates that might be better at another bank, even branch convenience because it might be around the corner... So we won’t see an exodus in 3-4 years from banks that don’t invest in UX and ML, but slowly and surely it will happen - and I think in an accelerating fashion, especially if competitors are other universal banks with competitive offerings and a similarly respectable brand and whatnot.

“It’s never either/or - UX/UI and machine learning must go in parallel”

In most cases, I don’t see the distinction between a defensive or offensive strategy; it works on both sides. If you are attractive for others to switch, that means it should be inherently more attractive to stay. There might be a difference if your acquisition drive is based on offers to hook new customers, then it’s just pure offensive. But if you go digital, it’s both. Especially if you transform your core business, which I will always advocate to start with, because if you don’t it’s almost like admitting an incapacity for change.

Do you believe traditional banks have very heavy backpack of legacy systems that will not allow them to move as quickly as the customers demand? Let’s qualify two things: one is customer demand; the other is it being more expensive than slow by definition. However by observing mBank - already a full-scale universal bank - it definitely has a different environment than a startup, for sure, however you can build out from there.

Unless your infrastructure is completely crumbling, in most cases you can change the experience. You can add products like PFM for liquidity management, and everything else that brings value: informing, testing, UI, committing to scalable change - all of these are ancillary systems you can add, and produce a very solid digital banking proposition even on an average legacy system. So saying legacy systems cause inertia - I believe it’s an excuse. The problem is not legacy systems, but rather the legacy mindset and emotions, which is a very different problem class to solve for.

I agree completely. Michal, this has been a very insightful and interesting conversation. Thank you again, and we wish you all the best! Author: Pau Velando General Manager

Consider the flipside, which I have witnessed firsthand at mBank: first we executed the digital transformation, while adding additional elements to acquire customers. From there we could manipulate other, non-digital parameters, and propose a very strong comparable proposition which in turn increased customer acquisition. It was a step change. Many of my former competitors and colleagues scratching their heads on how to tackle mBank, which is becoming a leader in terms of brand value.

Interesting: you present the digital transformation as a growth strategy whereas some players believe they have to go digital as a defense mechanism...

26

So, could it be different now that the worlds of bots and banking are colliding? Maybe. Big fish like Facebook and Microsoft are betting high on the concept of AI- driven user interfaces, and not only for the utility of the interface itself - but because bots represent a second chance to gain a strategic foothold in the mobile space.

BO

TS

27

E AC

RETAIL

FOOD

Backend systems of content & service providers

T/ DE LIV

O PM

NEWS/CONTENT

BOT STORE

EN TP LAT FORM

ECOMMERCE

EN NT CO

You can read a good evolution and state of the art here and here. Personally, I had the pleasure of working for two companies that developed their own virtual assistant (basically a chatbot with a cute face). You might remember Anna, IKEA’s robo-assistant - just one of a fairly comprehensive chatbot database here - although all kind of them have

somewhat faded away now without significantly transforming our lives. Integrating e- and m-commerce into the current banking business model will open up new revenue streams. Additionally, it can help FIs compete against tech giants like Apple, which is eyeing the financial services world. After launching Apple Pay, the company is working on a new e-commerce solution similar to Card-Linked Offers, which delivers targeted offers via mobile based on customers’ transactional data.

Bots which deliver Content/Service

END BACK

Jokes aside, very few concepts have shot up the hype curve so fast, especially considering that the idea of conversational UI has been with us for a long time in various forms and under different denominations. It looks like a jungle, but all bots are essentially doing the same thing: adding conversational capabilities to FAQ and search.

So, all signs point toward an AI-induced change in the way we interact with... well, probably everything.

Chat interface between the bots & humans

ER F

Bots (and articles about bots - oops!) are popping up everywhere these days. You might even call them ubiquibots!

According to Gartner, about 38% of American consumers have used virtual-assistant services on their smartphones recently; by the end of 2016 an estimated two-thirds of consumers in developed markets will use them daily.

I NT

ARTIFICIAL INTELLIGENCE IN BANKING: PAIN IN THE BOT?

This focus is already heating up the development landscape as chatbot technology advances at a rapid clip.

Google and Microsoft already o er digital assistants on smartphones, called Google Now and Cortana, respectively, which gain increasingly deep knowledge of their users’ habits and schedules. Amazon sells a stand-alone device called Echo that features Alexa, who can, among other things, play music, read books aloud and help buy items through Amazon. And Siri of course reigns over the Apple universe.

ER Y SY STEMS

BOT CREATION TOOL

INTERPRETOR / AI / NLP ENGINE

L VE E D TS BO

Platform to enable development of bots

28

BOTS FOR BANKS: AI AND FINANCIAL SERVICES Let’s take a step back and look at artificial intelligence from a financial services perspective. Although some interesting examples emerged from a recent Mondo hackathon, and some non-bank fintech startups are starting to introduce clever apps like Cleo and Penny, few others signals show these rea-

ching the retail banking mass market anytime soon. As far as I know, no bank yet offers a fully conversational interface outside their own app.

But here are a few promising examples: •

29

Santander UK recently added the ability for some account holders to ask questions directly to their bank accounts, using the Santander SmartBank App. The voice assistant service can pull transactions and process user requests to find details on a particular charge. Future versions promise to include voice-enabled payments, account alerts, stolen and lost card reporting and deeper insights into users’ spending.

•

Atom Bank, the UK-based mobile-only bank, announced that it is incorporating WDS Virtual Agent software from Xeros into its mobile app. The machine learning software will give customers an agent-like option for assisted self-service on the app.

•

Caixabank has implanted IBM Watson to help their business customers in the area of international commerce and expansion.

•

RBS has launched Luvo, to support sta to help them answer business customer queries more quickly and easily.

•

Swedbank Group, present in Sweden, Estonia, Latvia and Lithuania, is using Nina, an intelligent virtual assistant that delivers a human-like, conversational customer service experience to enable self-service capabilities and quick and easy access to information for Swedbank customers and service agents alike.

•

digibank by DBS probably o ers the most exciting example. Their mobile app is powered by Kasisto’s AI platform, KAI, which is unique in its ability to entertain multiple channels of conversation simultaneously.

Despite these examples, the fact remains that traditional banks with online presences tend to force customers to dig around in order to reach customer- service representatives—generally via a call or live

chat. Why is the current focus of these banking technologies not so much around self-serve information finding (FAQs, searches, etc) but rather customer service? Because, despite its inherent complexity,

there are a relatively finite number of customer problems and solutions for a given set of products combined with large amounts of historical data.

predicts in his clarion call to #ConvComm. However, this culture isn’t yet universal by any means - and there are, of course, major generational di erences around messaging behaviours.

This fits a “single-use” app like Uber (who already has an in-app messenger as well as a Facebook Messenger integrated bot), but if you are trying to increase the quantity and quality of interactions as banks desperately need to be doing, diverting users to another platform may not be the wisest move.

DOING THE ROBOT So, you’re thinking about bringing artificial intelligence technology to your financial institution - what do you need to take into consideration?

“The biggest hurdle, as with most digital transformation problems facing banks, will be in core systems integration” First, decide if you are betting for a chatbot or conversational UI in your app, or both. Regardless of the previous choice, the successful uptake of a natural language interface will largely depend on the culture of the market in which you operate. Messaging might become the dominant model of interacting with the world, as Uber DevEx lead Chris Messina

Bot discovery could be an issue for generic brands trying to get user attention but I don’t think discoverability will be a problem for a bank bot because, as a user, I will look for the service in the same way I follow companies’ Twitter accounts for customer service purposes. It will need some solid marketing though. Third: a bot might seem a good and easy way to keep in touch with your customer base, however prepare for some loss of control. As with any media publisher, you will be giving power to someone else’s platform.

A bot also amplifies the security problem. How should it identify and verify the user before providing information or allowing for more complex actions such as money transfers? But the biggest hurdle, as with most digital transformation problems facing banks, will be in core systems integration.

FUNCTION VS. CONVERSATION Interactions via natural language processing must be quick and simple - in a word, functional. From a bot perspective, one key di erentiator is the capacity for banks to allow richer “mini-apps” as part of their messaging experience, in which each message has the potential to become an atomic application. That means functionality must be broken down into manageable chunks supported by services or better said, micro-services, in the integration layers of core systems. Sadly, if you are a banker, these micro-services are unlikely to exist in your organization.

it comes to implementing conversational AI in banking. Here’s why: If we limit the choice of what users can do in a chat, we will need to somehow train the users or offer “menu” choices, much more obvious in a traditional interface, which reduces useability and defeats the purpose of a “conversation” in the first place. Check out this example from BI Intelligence:

Second, the MVP agile approach that works so well for mobile development could bring diffculties when

Additionally, PFM opens up various opportunities from which banks can extract value. Besides offering tangible benefits for such a strategically important retail banking operations including marketing, customer service, sales and channels, the tool plays a central role in enabling banks to develop new business models. This in turn will help FIs not

31

1

Adopting a state-of-the-art solution, which has the maturity and modularity to enable banks to deeply embed PFM into the core of its online banking and simultaneously address the needs of various segments.

2

Developing the right plans, strategies and tactics to address short, medium and long-term PFM marketing and product development needs.

3

Putting data mining and management infrastructure, Putting data mining and management infrastructure in place to measure and improve PFM performance, while monetizing data.

BBVA’s Chairman Francisco González gave a very telling answer when he was asked about his vision and expectations of BBVA’s PFM project prior to its launch.

CONCLUSION PFM is a must-have for banks that want to transform transaction-based static platforms into relationship-driven, engaging and dynamic propositions. PFM plays an essential role in building that ‘customer-centric’ digital banking experience demanded by today’s consumer. No other solution brings as much transparency, insight and context to digital banking.

Chatbots are not our friends, nor should we have to speak to them as such. WeChat is a good example of what functional chatbot interactions should look like:

only to meet changing consumer needs and generate new revenue streams, but also combat potential threats from the likes of Apple and Facebook. On paper, PFM is a win-win both for banks and their customers. But to leverage its benefits in reality, banks should focus on: Some predict that 2016 will be the year of conversational commerce, but the most effective chatbots have little to do with conversation.

Author: Luis Rodriguez VP Product Strategy

“BBVA is not worried about the number of new customers or increase in revenue that PFM initiative could bring. The bank’s focus is not to lag behind in the race to the bank industry of the future. Those who don’t go forward become losers.”

THE BEST OF

FINTECH PULSE blog.strands.com